I can’t count the times I’ve had the conversation about opening credit cards in college with friends and the trouble it got us all in before we were 21. For many of us our parents forewarned us of the drama credit card debt would cause us, but our non-existent college budgets made applying for credit a temptation we couldn’t resist. Credit card companies know this, and make it their business to camp out college campuses across the nation to prey on poor college students.
However, not every young person is fortunate enough to be forewarned about the dangers of opening a credit account without the proper knowledge of how it works. Financial illiteracy is typically passed down from one generation to the next, leaving a long trail of bad correct in need of repair.
What I didn’t know then that I understand now it what a process it would be for me to develop good credit after damaging it so badly, and how important good credit is in relation to buying power. Nothing beats cash and a good savings account, but good credit is next to gold when it comes to making certain purchases. Take the following steps with your own credit to master management of it:
Read your credit report. It’s a bad habit to avoid your credit report, especially when you know you’ve ran up credit or have paid bills late. Read your credit report thoroughly especially when you have established bad credit so you can determine how to repair it. Look for misreported account activity, negative information and account alerts to see where you stand. Everyone is given three free reports a year through annualcreditreport.com. a website sponsored by the three credit reporting agencies (Experian, Equifax, and Transunion). You may also purchase your credit score for a mere $8.
Understand your FICO (credit) score. FICO (which stands for Fair Isaac Corporation) and is the number used by lenders to determine your credit worthiness (or the likelihood of you paying your debts). FICO scores range from 300-850 and the lower your score, the greater a risk lenders will consider you. Factors that affect your credit score are: payment history, credit utilization, length of credit history, types of credit used, and recent searches for credit.
Understand the difference between the types of account listed on your credit report. The types of credit accounts that are listed on your credit report are:
Mortgage: A loan given for the purchase of property.
Installment: The type of credit that has a fixed number of payments. Student loans and car payments are examples of installment accounts.
Revolving: The type of credit that does not have a fixed number of payments, as the amount of credit can increase or decrease as funds are borrowed and repaid. Credit cards are an example of revolving credit.
Consumer Finance: Consumer finance refers to alternative financial services that consumers depend on. Payday loans and rent-to-own agreements are examples of consumer finance.
The best debt-to-credit ratio to manage is around 30%. For example, if you are given an $1000 credit limit, and you keep your limit to $300 or less, you will maintain a good credit score. Once you cross the 40% limit, your credit score will start going down. It’s can be tempting to spend more than half of the credit extended to you, but keep in mind that the more you spend, the more challenging it will become to get credit extended to you elsewhere.
Pay more than the minimum required amount towards your debts. Even if you can only afford $5 over the minimum, do it. Paying just the minimum amount on account will have you paying the maximum in interest! Save yourself some time and money and pay as much as you can afford.
Avoid credit consolidation companies. There are many companies that offer to help you bundle your debt into once nice monthly payment. As attractive as it sounds, utilizing one of these companies will leave a negative mark on your credit report. It says to lenders that you aren’t responsible to pay your bills on your own.
Don’t close any accounts. Even after you’ve paid off an account, don’t close it. If possible, use it sparingly when needed. Closed accounts also negatively affect your FICO score.
Pay your bills on time. Your credit report tracks how many days late your payments are from the due date and keeps record of how often this happens. Paying your bills on time will help you raise your FICO score by showcasing a history of you paying your debts as agreed.
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